Tax Implications for Transactions and Employee Benefits

TAXATION
Student Name
[Pick the date]

Question 1
Issue
The given task aims to highlight the tax implications with regards to the transactions that Amber
has entered into. The impact of these transactions could lead to production of assessable income
or have implications in the form of capital gains tax (CGT) when the underlying proceeds are
capital. The crucial issues concerned are listed as below.
1) Shop sale – Whether the proceeds are revenue or capital? Also, the CGT implications need to
be highlighted with focus on the various constituent items.
2) Restrictive Covenant - Whether the proceeds are revenue or capital? Also, the tax implications
based on this identification of proceeds needs discussion.
3) Sale of apartment - Whether the proceeds are revenue or capital? If capita then whether the
proceeds would attract CGT or not and the relevant mechanism of computation.
Law
The relevant law which is applicable to the transactions enacted by Amber are as follows.
Shop Sale
The first aspect is to highlight the capital asset which has been carried out in s. 108-5 ITAA 1997
whereby land, shares, property, goodwill are recognised as capital assets. It is critical to note that
capital assets need not be tangible and even intangible assets such as goodwill are included
within the fold of capital asset. This definition of capital assets is critical owing to proceeds from
the sale of these assets being labelled as capital proceeds (Krever, 2016). Contributions to the
assessable income only include revenue receipts as capital receipts merely highlight the return of
capital previously invested. However, any capital gains or losses that are derived in the process
would attract CGT. In this regards, the first step is to highlight the capital event and label it in
accordance with s. 104-5. This is critical since the precise methodology of CGT computation
depends on the underlying event. With regards to disposal of a capital asset, the relevant event
would be A1 which indicates that capital gains can be computed by finding the difference
between proceeds of sales and asset cost base (Barkoczy, 2017).

However, an exception to this discussion is stock which in accordance with s. 118-25 ITAA
1997 would not have any CGT implications irrespective of the quantum of capital gains or losses
realised on the sale. Further, the asset cost base is computed as per s. 110-25 which lists down
five crucial elements that are included in cost base (Sadiq et. al, 2016). Once the gross capital
gains are obtained, then the same can be reduced further through the application of discount
method as highlighted under s. 115-25 ITAA 1997. This method allows for 50% lowering of
capital gains provided the underlying asset was held for a period exceeding one year. Another
alternative method named indexation method increases the cost base by making relevant inflation
related adjustments to lower the taxable capital gains (Woellner, 2014).
Restrictive Covenant
The key issue pertaining to restrictive covenant related contracts is whether the proceeds would
assume revenue nature or capital. This question becomes pivotal for highlighting the appropriate
taxation treatment of these proceeds. A relevant taxation ruling to help in this regards is TR
95/35. In accordance with this ruling, the restrictive covenant tends to levy restrictions on the
given individual with regards to opening a new business in a given geography within a given
time frame. The restrictions imposed in the form of restrictive covenant restrict the right of the
taxpayer (CCH, 2013). This right of the taxpayer if unconstrained can potentially produce future
cash flows for the taxpayer over several years and therefore, the right available to the taxpayer to
open business without any restrictions related to geography and time is an assets. As a result,
proceeds from restrictive covenant would be capital proceeds. Support for this is highlighted by
the verdict in the Reuter v. FC of T 93 ATC 4037; (1993) 24 ATR 527 case where the proceeds
arising from restrictions on right of sue were termed as capital proceeds (Deutsch, Freizer,
Fullerton, Hanley & Snape, 2016).
Apartment
As per s. 108-5, one of the capital assets is property which includes apartment which is
essentially a fixed asset. This implies that the proceeds derived from sale of the apartment would
lead to capital proceeds which are free from taxation burden as it does not indicate any economic
benefit. However, CGT implications may result based on the comparison of the cost base and the
sales proceeds generated. It is essential to note that in accordance with s. 104-5 ITAA 1997, the

death of the owner does not result in a capital event and thereby there is no need to derive the
underlying capital gains or losses (Barkoczy, 2017). As a result, the CGT implications would be
considered only when the asset is disposed by the legal heir. Also, is relation to potential
mismatch of timing between sale contract enactment and sale proceeds receipt, TR 94/29
advocates that CGT liability ought to be levied in the year when the contract is executed. An
addition aspect which is pivotal in regards to residential properties is that these may be used by
the owner as residence (CCH,2013). In such cases, the house or apartment would be treated as
main residence and subdivision 118-B ITAA 1997 provides complete CGT exemption on the
sale of the house. A necessary condition is that the property should not be used for rent or any
other assessable income generation and must serve as main residence of the taxpayer for the
complete holding period (Deutsch, Freizer, Fullerton, Hanley & Snape, 2016).
Application
Shop Sale
In line with the information provided, it is evident that the underlying chocolate shop contains a
host of assets but these are capital assets and hence the payment from these would be capital
proceeds which would be free from taxation burden. However, the CGT implications could
potentially arise which need to be highlighted.
One of the capital assets from the shop is goodwill which has been disposed triggering an A1
event. The resultant capital gains therefore would be required to be computed by considering the
cost price and selling price of the same which has been provided in the given case. Also, the
taxable capital gains subject to CGT would be half of the capital gains obtained through
procedure referred under A1 event.
Another capital asset is the equipment whose disposal also triggers an A1 event but the
computation of capital gains on this asset would be different from goodwill. This is because
equipment is a depreciable asset on which depreciation expense is deducted for tax purpose by
the business. Thus, for CGT computation, a comparison between the sale value and the
underlying book value ought to be considered. Deduction under s. 115-25 may be availed owing
to long term asset ownership. However, the stock related capital gains or losses would be
ignored.